Attacking the Symptoms instead of the root cause

According to major newspapers the finance ministry has been unable to stop the slide of the rupee against the dollar. The UPA government is actually fighting the symptoms and not the root cause.

The root cause is Current account deficit (CAD) which is Petroleum products and Gold imports. The government is in an unenviable situation as it cannot take the bull by its horns as General elections is just less than a year away ( I mean decontrol of Diesel prices). The lure of gold as an investment has always had its charm for Indian households and decontrol of diesel is not possible before May 2014 (unless elections are held before that). Although import of gold has fallen this month (july) but petroleum products  (read Diesel)are the biggest enemy of CAD.

So the Finance Ministry is left with only tools to increase foreign exchange investment in public sector enterprises to fund CAD. This is more like attacking the symptoms rather the root cause. Hence the tough balancing act by the finance ministry will continue till May 2014. Meanwhile let the RBI and Finance ministry hope its efforts will contain the CAD. I pray that the balancing act should give fruits else we are in 1991 mode or worse it will be like the ASEAN countries in late 90s.